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Wall Street goes wild for CrowdStrike after $6.1B cybersecurity exit

CrowdStrike debuted on the NASDAQ to a pop of over 70% from an already upwardly revised debut price of $34. NASDAQ’s Nelson Griggs welcomed CrowdStrike CEO George Kurtz, right, to the exchange Wednesday.

Cloud-based cybersecurity company CrowdStrike has debuted to a strong pop of nearly 80%, opening at $63.50 before retreating to close at $58 Wednesday. Late Tuesday, the Silicon Valley-based unicorn had priced its shares at $34, well above the $28 to $30 range it previously expected, which in turn was raised from an original $19 to $23 range. As a result of the intense first-day buying, the company now holds an $11.4 billion market cap.

CrowdStrike’s public debut is 2019’s second cybersecurity IPO in New York after Tufin (NASDAQ: TUFN), which debuted in April at $14 per share with 7.7 million shares offered. CrowdStrike’s final $6.08 billion private valuation leading into its IPO ranks second largest since 2010, with China’s Cheetah Mobile taking the top spot after recording a $9.5 billion private valuation immediately before raising its IPO funding in 2014.

Founded in 2011, the company previously raised a $200 million Series E with a $3.35 billion valuation in June 2018. Here’s a list of the largest VC-backed cybersecurity exits since 2010, according to the PitchBook Platform:

The annual number of such exits seems to have stabilized. 2018 saw four VC-backed cybersecurity IPOs, while 2017 saw three, according to the PitchBook Platform. Here’s what the quantity of such exits looks like since 2010:

The excitement surrounding CrowdStrike’s IPO may be due to a perception of imminent profitability amid rapidly multiplying growth. For the year ended Jan. 31, 2019, the company reported $249.82 million in revenue, about a 110% increase from the $118.75 million reported for 2018 and about five times the $52.75 million for 2017.

While such growth is thrilling, the company’s net loss of $140.08 million for the most recent fiscal year largely comes from its enormous $172.68 million spent on sales and marketing. The pattern behind this loss metric roughly mirrors the company’s revenue growth percentage, as the sales and marketing loss for the year ended Jan. 31, 2018 was $104.28 million, almost double the $53.75 million reported for 2017.

Investors may be willing to shrug this off and focus just on the revenue growth and the company’s strong retention rates, seen below:

Crowdstrike's retention rates
CrowdStrike's dollar-based retention rates (Source: June 6, 2019 S-1)

Per its S-1, CrowdStrike credits strong retention rates and potential upselling-related growth to its February 2017 decision to divide its former single product offering into multiple offerings encompassing several product SKUs. This is shown in the various incarnations of its flagship Falcon platform, which is offered at four subscription levels. For reference, before marketing expenses and other smaller operating expenses are subtracted, the company saw a gross profit of $162.59 million for the year ended Jan. 31, 2019, up from $64.27 million a year prior.

Knowing this context, the company’s steep marketing expenses seem rather healthy as it builds a subscriber base for its low-overhead operations. Looking forward, once the marketing expenses are dramatically reduced upon company maturity, net profitability could be realized, assuming retention rates remain high.

Dual-Class Structure

According to the company’s June 6 S-1 statement, the IPO recorded 18,000,000 Class A shares and 178,688,971 Class B shares of common stock outstanding. Following a trend set by other recent IPOs, including Lyft, the stock holds a dual-class structure, meaning each Class B share represents 10 votes compared with Class A shares only holding one vote each.

Therefore, per the company’s S-1, “our executive officers, directors, each of our stockholders that currently owns more than five percent of our outstanding capital stock, and their respective affiliates will hold, in aggregate, 75% of the voting power of our outstanding capital stock.” To narrow it further, Warburg Pincus, Accel and CapitalG and each firm’s affiliates collectively control 62% of voting power by holding 30.2%, 20.2% and 11.1% of Class B shares, respectively.

While the dual-class structure is considered a controversial practice, as it contradicts the “publicly held” intention of a stock market, it seems to do little to dissuade the general public from buying shares, as evidenced by the stock’s day one performance and volume. Further, the concept is not new, with roots dating back to the early 1900s, according to a 2018 research report from Emory University.

Featured image of CrowdStrike CEO George Kurtz, right, and NASDAQ’s Nelson Griggs courtesy of CrowdStrike

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    Written by Ian Agar

    Ian Agar was a financial writer at PitchBook covering venture capital.

    A native of Southern California, he joined the US Coast Guard and received his BA in Psychology from American Military University. After leaving the military, he was a writer for SeekingAlpha for over six years covering blue-chip stocks and fast-growing small-cap companies. Although studying charts and financial reports excite him, his wife is his real passion in life—especially when they both spend time studying charts and financial reports together.

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